How do I calculate the minimum cost for meeting demand considering capacity constraints of 2 warehouses and the demands of 6 customers?
Strategies for Meeting Demand
According to a Prentice Hall excerpt available online, strategies for meeting demand are necessary when demand fluctuates or when resources are limited. Unlimited resources and steady demand can accommodate the small fluctuations that arise with adjustments to working time through over time or undertime. Some strategies for meeting demand include maintaining high resource levels to meet rise in demand, subcontracting elements of production to other firms, employing part-time workers and also:
- Level production: maintaining steady production and using inventory to meet demand fluctuations.
- Chasing demand: hiring and firing in line with rising and falling demand.
- Worktime adjustments: allotting overtime to meet rising demand and undertime to match falling demand.
- Backordering: providing high demand order fulfillment at a later date.
Calculating Minimum Cost for Meeting Demand
There are several strategies outlined by Prentice Hall in the excerpt "Strategies for Meeting Demand." The first is the trial and error method. Since there are so many options for adjusting to demand, enumerated above, and since many can be used in combination with others, such as (a) worktime adjustments used with (b) subcontracting and (c) level production, trial and error allows management to combine different approaches and see which result in minimum costs.
Using trial and error to solve aggregate production planning problems involves formulating several strategies for meeting demand, constructing production plans from those strategies, determining the cost and feasibility of each plan, and selecting the lowest cost plan from among the feasible alternatives. ("Strategies for Meeting Demand," Prentice Hall)
A more accurate method for more complicated situations is the linear programming method, which uses demand constraints (for example of six customers), construction constraints and work force constraints to determine the optimum work force adjustments and the optimum mix of production and inventory (reflecting warehouse constraints) to reach the minimum cost for meeting demand.
A variation of linear programming method is the transportation method of linear programming in which all cost information data is gathered into one matrix. Minimum cost for meeting demand is then based on the lowest-cost alternatives.
Using trial and error to solve aggregate production planning problems involves formulating several strategies for meeting demand, constructing production plans from those strategies, determining the cost and feasibility of each plan, and selecting the lowest cost plan from among the feasible alternatives. The effectiveness of trial and error is directly related to management's understanding of the cost variables involved and the reasonableness of the scenarios tested.